The Securities and Exchange Board of India (SEBI) on January 10, 2023, floated a consultation paper on additional proposals concerning the issuance of subordinate units by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Following last month's initial consultation paper, SEBI aims to further regulate the framework for these subordinate units, seeking limits on the number of subordinate units that can be issued and uniformity in the granted rights of such units. “The objective of this consultation paper is to seek comments from the public on the following additional proposals: (a) Specification of a ceiling on the extent of subordinate units that can be issued; (b) Bringing uniformity like rights conferred on subordinate units; c) Dealing with changes in terms and conditions of the subordinate units post-issuance,” Sebi said in the circular seeking public comments till January 31, 2023.
The creation and issuance of subordinate units are designed to bridge the valuation gaps arising from differences in the valuation of an asset perceived by the Sponsor and investors/unitholder. Sebi proposed the need for an upper ceiling on subordinate unit issuance as it feels these valuation gaps will not be too wide or broad.
Subordinate units can be issued only to the sponsor, its associates and the sponsor group, carrying inferior voting rights compared to ordinary units.
SEBI now proposes that the issuance of subordinate units at the time of any asset acquisition should not exceed 10 per cent of the asset's acquisition price. Further, the total number of outstanding subordinate units should not exceed 10 per cent of the total number of outstanding ordinary units at any point in time.
Sebi also posed questions on whether these units should carry only inferior voting rights inferior distribution rights, or both. It also sought to eliminate complexity by questioning whether inferior rights on all subordinate units issued by a REIT/ InvIT shall be similar.
“If there is uniformity across the industry about the extent of inferior rights offered on the subordinate units, it will aid in easier understanding of subordinate units for investors, and easier comparison of unitholding across REITs and InvITs,” Sebi said. Comments are also invited on whether subordinate unit rights should be uniform industry-wide or if each REIT or InvIT can have its own set of subordinate units.
Last month, Sebi established a regulatory framework for Small and Medium REITs (SM REITs), enabling entities with lower asset holdings compared to existing REITs, to create separate schemes for owning real estate assets.